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Tuesday, April 19, 2011

A Response To: Is Anyone Listening to the S.&P.?

The quick answer, yes, and they should. L. Randall Wray, a professor of economics, tackled the question and said that we should just Ignore the Raters. Can anyone guess what political persuasion he favors? Well, no matter how crazy the viewpoint may seem, it needs to be responded to.

In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor's rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.

I really like that first sentence. Instead of asking why S.&P.'s downgraded the rating, Wray makes up something out of thin air. The view of that company could not be due to any real concerns; instead it is a political ploy according to Wray. Wow. And then after that, he attacks the credibility of the raters. Wray apparently does not know why the ratings were so high: not many people saw the price crash. Progressive economists did not see it, most investors did not see it, and these rating companies most certainly did not see it. In fact, the only people who were really concerned about the prices were Austrian economists. So, can we get a real argument as to why the outlook should not be changed?

Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks. Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”

Wray, you are an economist, and you cannot figure this out? The scenario that he is explaining is basically that the government can just print money to pay back the debt. Is he serious? Apparently the economist knows nothing about inflation. Paying back those debts with printed money would mean that investors would get less back than they paid in real terms. That is a real concern. I know progressive economists do not like to admit it, but inflation has real negative consequences, and this is one of the areas with negative consequences. The same idea holds for paying off social security with newly printed money.

Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.

I like the first two sentences, but then he goes and ruins it with his last sentence. Capital is not a homogenous item! Capital that is not being used today cannot just go to any sector. A crane is great for construction, but holds very little use to a farmer. In the same way, a construction worker is of no use to an accounting firm. The reason that capital is not being used is because we are not allowing companies to fail. If a construction company is overextended, it needs to contract. We do not need to prop it up. It merely prolongs the pain and we need to redirect our efforts to those sectors where people are demanding work be done. For example, we need less capital in the housing construction industry, so let it shrink already so we can redirect our capital elsewhere, where people actually want it.

Wray, as like most progressive economists, does not understand capital. They think that a hotel service worker can just easily move on to another industry and there will be no issues. Those of us with common sense know better, but those economists treat capital as a single homogenous unit. Their equations treat it as a single variable. This is just one reason why their models are seriously flawed. Why do we take their advice when we know they are wrong? At least S.&P.'s knows what is happening and is starting to get worried. Regular people have been worried for a long time. When will progressive economists wake up and realize the harm that their fallacious models have done?

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About Me

I'm a teaching assistant in a microbiology lab at UCLA. I love baseball, especially the Dodgers, and I like to follow politics. I'm a libertarian, but more importantly my politics are internally consistent. I also enjoy a good beer.